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PRICE DETERMINATION SUPPLY & DEMAND DEMAND What is demand? The quantity of a good or service that consumers are willing and able to buy at different prices What does demand look like? D Price D Quantity Demanded Shifts in demand price D D1 D2 quantity Factors affecting demand Changes in peoples incomes Changes in income taxes Changes in the population Changes in the price of other goods Changes in tastes or fashions Advertising Changes to government legislation Changes in the weather SUPPLY What is supply? “The amount of good or service producers are willing and able to produce at different prices” What does supply look like? S price S Quantity supplied Shifts in supply Price S2 S Quantity S1 Factors affecting supply Changes in the price of other commodities Changes in the cost of the factors of production Technical progress Changes in the weather Government taxation or subsidies Finding the Equilibrium The price of the product can then be set, it is the point where demand meets supply. D S S D price P Q quantity Price Elasticity of Demand Price elasticity of demand explains how responsive quantity demanded is with a change in price If demand increases at a higher rate than price demand is said to be Price Elastic If demand increases at a lower rate than price demand is said to be Price Inelastic Factors affecting PED The number of available substitutes The Period of time The proportion of Income spent on the commodity
